Content Type: Working Paper / Topic: Economics

3101. Productivity Shocks, Habits, and the Current Account

Author:: Joseph W. Gruber
Publication Date:: 08-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Empirical work regarding Intertemporal Current Account (ICA) models has centered around two distinct testing methodologies, present value tests and a productivity shock approach as formulated by Glick and Rogoff (1995). In previous work, Gruber (2001), I have tested and ICA model that allows for habits in aggregate consumption via the present value method. This paper applies the alternative Glick and Rogoff style approach to testing the model. The benefits of doing such are an ability to separate country-specific from worldwide output changes, a distinction of considerable importance, as well as to impose restrictions on the relationship between investment and output, neither of which are possible in the present value framework. The results of the test are supportive of the existence of habits and coincide with the results of Gruber (2001). The degree of habit persistence implied by the model is estimated for the G-7 countries. The paper also proposes habit formation as a possible solution to an empirical puzzle identified in the original Glick and Rogoff paper.
Topic:: International Relations, Economics, and International Trade and Finance
Political Geography:: United States

3102. Testing the Null of Identification in GMM

Author:: Jonathan H. Wright
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: This paper proposes a new test of the null hypothesis that a generalized method of moments model is identified. The test can detect local or global underidentification, and underidentification in some or all directions. The idea of the test is to compare the volume of two confidence sets -- one that is robust to lack of identification and one that is not. Under the null hypothesis the relative volume of these two sets is Op(1), but under the alternative, the robust confidence set has high probability of being unbounded.
Topic:: Economics and International Trade and Finance
Political Geography:: United States

3103. Factor Endowments and Industrial Structurev

Author:: Trevor A. Reeve
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: What determines industrial structure? Do sector-specific characteristics such as unionization, regulation, and trade policy dominate production patterns? One is inclined to believe so based on countless industry-level studies and the many political battles that are continually fought over trade and industrial policy. In contrast, standard neoclassical trade theory suggests that industrial structure is primarily driven by relative factor supplies. This paper demonstrates that aggregate factor endowments explain much of the structure of production—independent of industry idiosyncrasies—and quantifies the extent to which shifts in industrial structure in a cross section of countries are driven by the broad forces of factor accumulation. This result has important implications for policy. In particular, investment in physical capital and education may have as great an impact on the pattern of production as sector-specific trade and industrial policies. Thus, general equilibrium effects should not be ignored in efforts either to understand industrial structure or to form policies that attempt to alter it. These conclusions are reached through an empirical application of the factor proportions model of production.
Topic:: Economics, Industrial Policy, and International Trade and Finance
Political Geography:: United States

3104. Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?

Author:: Beth Anne Wilson, Shaghil Ahmed, and Andrew Levin
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: The volatility of U.S. real GDP growth since 1984 has been markedly lower than that over the previous quarter-century. In this paper, we utilize frequency-domain and VAR methods to distinguish among several competing explanations for this phenomenon: improvements in monetary policy, better business practices, and a fortuitous reduction in exogenous disturbances. We find that reduced innovation variances account for much of the decline in aggregate output volatility. Our results support the “good-luck” hypothesis as the leading explanation for the decline in aggregate output volatility, although “good-practices” and “good-policy” are also contributing factors. Applying the same methods to consumer price inflation, we find that the post-1984 decline in inflation volatility can be attributed largely to improvements in monetary policy.
Topic:: Economics, Industrial Policy, and International Trade and Finance
Political Geography:: United States

3105. Optimal Monetary Policy with Durable and Non-Durable Goods

Author:: Christopher J. Erceg and Andrew T. Levin
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: The durable goods sector is much more interest sensitive than the non-durables sector, and these sectoral differences have important implications for monetary policy. In this paper, we perform VAR analysis of quarterly US data and find that a monetary policy innovation has a peak impact on durable expenditures that is roughly five times as large as its impact on non-durable expenditures. We then proceed to formulate and calibrate a two-sector dynamic general equilibrium model that roughly matches the impluse response functions of the data. While the social welfare function involves sector-specific output gaps and inflation rates, we find that performance of the optimal policy rule can be closely approximated by a very simple rule that targets a weighted average of aggregate wage and price inflation rates. In contrast, some commonly-prescribed policy rules (such as strict price inflation targeting and Taylor's rule) perform very poorly in terms of social welfare.
Topic:: Economics, Human Welfare, and International Trade and Finance
Political Geography:: United States

3106. A Theory of the Currency Denomination of International Trade

Author:: Philippe Bacchetta and Eric van Wincoop
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Nominal rigidities due to menu costs have become a standard element in closed economy macroeconomic modeling. The "New Open Economy Macroeconomics" literature has investigated the implications of nominal rigidities in an open economy context and found that the currency in which prices are set has significant macroeconomic and policy implications. In this paper we solve for the optimal invoicing choice by integrating this microeconomic decision at the firm level into a general equilibrium open economy model. Strategic interactions between firms play a critical role in the analysis. We find that the less competition firms face in foreign markets, as reflected in market share and product differentiation, the more likely they will price in their own currency. We also show that when a set of countries forms a monetary union, the new currency is likely to be used more extensively in trade than the sum of the currencies it replaces.
Topic:: Economics, Emerging Markets, and International Trade and Finance
Political Geography:: United States

3107. Regional Inflation in a Currency Union: Fiscal Policy vs. Fundamentals

Author:: Margarida Duarte and Alexandar L. Wolman
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: We develop a general equilibrium model of a two-region currency union. There are two types of goods: non-trade goods, and traded goods for which markets are segmented. Monetary policy is set by a central monetary authority and is non-neutral due to nominal price rigidities. Fiscal policy is determined at the regional level by each region's government. We find that productivity shocks alone generate significant variation in inflation across the two countries. Government spending shocks, in contrast, do not account for a significant portion of inflation variation. Varying relative country size, we find that smaller countries experience higher variability of their inflation differential in response to shocks to productivity growth. Moreover, we show that regional governments can suppress incipient inflation differentials associated with shocks to productivity growth by letting the income tax rate respond negatively to inflation differentials.
Topic:: Development, Economics, and International Trade and Finance
Political Geography:: United States

3108. Inflation Dynamics and International Linkages: A Model of the United States, the Euro Area, and Japan

Author:: Gunter Coenen and Volker Wieland
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: In this paper we estimate a small macroeconometric model of the United States, the euro area and Japan with rational expectations and nominal rigidities due to staggered contracts. Comparing three popular contracting specifications we find that euro area and Japanese inflation dynamics are best explained by Taylor-style contracts, while Buiter-Jewitt/Fuhrer- Moore contracts perform somewhat better in fitting U.S. inflation dynamics. We are unable to fit Calvo-style contracts to inflation dynamics in any of the three economies without allowing either for ad-hoc persistence in unobservables or a significant backward-looking element. The completed model matches inflation and output dynamics in the United States, the euro area and Japan quite well. We then use it to evaluate the role of the exchange rate for monetary policy. Preliminary results, which are similar across the three economies, indicate little gain from a direct policy response to the exchange rate.
Topic:: Economics and International Trade and Finance
Political Geography:: United States, Japan, and Israel

3109. Macroeconomics of International Price Discrimination

Author:: Giancarlo Corsetti and Luca Dedola
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: This paper builds a baseline two-country model of real and monetary transmission under optimal international price discrimination. Distributing traded goods to consumers requires nontradables; because of distributive trade, the price elasticity of export demand depends on the exchange rate. Profit-maximizing monopolistic firms drive a wedge between wholesale and retail prices across countries. This entails possibly large deviations from the law of one price and incomplete pass-through on import prices. Yet, consistent with expenditure-switching effects, a nominal depreciation generally worsens the terms of trade. Moreover, the exchange rate and the terms of trade can be more volatile than fundamentals. For plausible ranges of the distribution margin, there can be multiple steady states, whereas large differences in nominal and real exchange rates across equilibria translate into small differences in consumption, employment and the price level. Finally, we show that with competitive goods markets international policy cooperation is redundant even under financial autarky.
Topic:: Economics, Emerging Markets, and International Trade and Finance
Political Geography:: United States

3110. Finding Numerical Results to Large Scale Economic Models Using Path-Following Algorithms: A Vintage Capital Example

Author:: Brett Berger
Publication Date:: 06-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: This paper describes the numerical optimization methods used in Berger (2001) to find the complete time paths of key economic variables in neoclassical vintage capital models. An interior and a non-interior point method are discussed. Both of the methods are part of the general class of “path-following” algorithms. These algorithms can be efficiently applied to convex programming problems; and due to the standard shape of production and utility functions, many economic problems can be written as convex programming problems. Vintage capital models add scale and complexity to standard growth models because one must now handle the dynamics of multiple capital stocks. This increase in complexity will often prevent the discovery (or existence) of closed form solutions, making numerical solutions of the type found in Berger (2001) necessary.
Topic:: Economics, Industrial Policy, and International Trade and Finance
Political Geography:: United States

3111. Preventing Deflation: Lessons From Japan's Experience in the 1990s

Author:: Jane Haltmaier, Alan J. Ahearne, Joseph Gagnon, and Steve Kamin
Publication Date:: 06-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: This paper examines Japan's experience in the first half of the 1990s to shed some light on several issues that arise as inflation declines toward zero. Is it possible to recognize when an economy is moving into a phase of sustained deflation? How quickly should monetary policy respond to sharp declines in inflation? Are there factors that inhibit the monetary transmission mechanism as interest rates approach zero? What is the role for fiscal policy in warding off a deflationary episode? We conclude that Japan's sustained deflationary slump was very much unanticipated by Japanese policymakers and observers alike, and that this was a key factor in the authorities' failure to provide sufficient stimulus to maintain growth and positive inflation. Once inflation turned negative and short-term interest rates approached the zero-lower-bound, it became much more difficult for monetary policy to reactivate the economy. We found little compelling evidence that in the lead up to deflation in the first half of the 1990s, the ability of either monetary or fiscal policy to help support the economy fell off significantly. Based on all these considerations, we draw the general lesson from Japan's experience that when inflation and interest rates have fallen close to zero, and the risk of deflation is high, stimulus–both monetary and fiscal–should go beyond the levels conventionally implied by baseline forecasts of future inflation and economic activity.
Topic:: Economics, Industrial Policy, and International Trade and Finance
Political Geography:: Israel

3112. International Comparisons of Productivity Growth: The Role of Information Technology and Regulatory Practices

Author:: Christopher Gust and Jaime Marquez
Publication Date:: 05-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: While information technologies (IT) are credited with the recent acceleration in productivity in the United States, many other industrial countries have not experienced a pickup in productivity growth. To explain this productivity divergence, we use panel data from 1992 to 1999 for 13 industrial countries and find that this divergence is driven in part by differences in both the production and adoption of information technologies. Based on this finding, we proceed to investigate what factors might play a role in explaining differences in IT adoption. Our results support the view that burdensome regulatory environments and in particular regulations affecting labor market practices have impeded the adoption of information technologies and slowed productivity growth in a number of industrial countries. We then develop a theoretical model with vintage capital and labor to evaluate the effect of more stringent labor market regulations on a firm's decision to adopt new technologies. We establish conditions under which a tax on firing workers delays the adoption of IT technology. These conditions occur when technological change is skill-biased and a firm must upgrade the quality of its workforce through labor turnover. The resulting delay in adopting IT technology then has negative implications for economy-wide productivity and is largely consistent with our empirical results.
Topic:: Economics, International Trade and Finance, and Science and Technology
Political Geography:: United States

3113. A Guide to Choosing Absolute Bank Capital Requirements

Author:: Mark Carey
Publication Date:: 05-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Resampling implementation of a stress-scenario approach to estimating portfolio default loss distributions is proposed as the basis for estimates of the appropriate absolute level of economic capital allocations for portfolio credit risk. Estimates are presented for stress scenarios of varying severity. Implications of use of different analysis time horizons are analyzed. Results for a numeraire portfolio are quite sensitive to such variations. Although the analysis is framed in terms of recent proposals to revise regulatory capital requirements for banks, the arguments and results are also relevant for bankers making capital structure decisions.
Topic:: Economics and International Trade and Finance
Political Geography:: United States

3114. To What Extent Will the Banking Industry be Globalized? A Study of Bank Nationality and Reach in 20 European Nations

Author:: David C. Smith, Allen N. Berger, Qinglei Dai, and Steven Ongena
Publication Date:: 05-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: We model two dimensions of bank globalization – bank nationality (a bank from the firm's host nation, its home nation, or a third nation) and bank reach (a global, regional, or local bank) using a two-stage nested multinomial logit model. Our data set includes over 2,000 foreign affiliates of multinational corporations operating in 20 European nations. We find that these firms frequently use host nation banks for cash management services, and that bank reach may be strongly influenced by this choice of bank nationality. Our results suggest limits to the degree of future bank globalization.
Topic:: Economics, Globalization, and International Trade and Finance
Political Geography:: United States

3115. Equity Prices, Household Wealth, and Consumption Growth in Foreign Industrial Countries: Wealth Effects in the 1990s

Author:: Carol C. Bertaut
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Although most recent empirical research regarding the size and significance of the impact of changes in wealth on consumption has looked for such effects in the United States, equity prices in the 1990s rose considerably in most other industrial countries as well. This paper investigates the strength of the wealth effect across countries. Using a variety of methods, I find evidence of significant wealth effects in the United Kingdom and Canada of a size comparable to that in the United States, reflecting the importance of equities in aggregate household wealth in these countries. A significant wealth effect is also evident in Japan, but because household wealth has changed little on balance in Japan in recent years, this channel has been less important in explaining Japanese consumption growth in the second half of the 1990s. Despite a rapid appreciation in equity prices and an increase in equity ownership in the major continental European countries since 1995, equities remain a less important form of household wealth in most of these countries, and the consumption response to changes in wealth remains limited. However, in some smaller European countries where equity issuance is more common, the emerging evidence suggests that wealth effects may be more important.
Topic:: International Relations, Economics, Globalization, and International Trade and Finance
Political Geography:: United States, United Kingdom, Europe, and Canada

3116. International Coordination of Macroeconomic Policies: Still Alive in the New Millennium?

Author:: Joseph E. Gagnon, Dale W. Henderson, Brian M. Doyle, and Laurence H. Meyer
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: In this paper we provide two building blocks for an analysis of international policy coordination: (1) a survey of models of policy coordination, and (2) an account of experience with policy coordination among the G-7 countries and within Europe since the breakdown of the Bretton Woods System. Using these building blocks, we investigate the correspondence between the models and experience and attempt to draw lessons for both the modelers and the practitioners. We find that the correspondence is close enough that the models help in analyzing several instances of actual policy coordination, but that the correspondence could be even closer. As for lessons for modelers, we suggest that they devote more attention to the analysis of information exchange, a key feature of practical policy coordination; to the coordination of different types of policies; to the ramifications of political divisions within countries; and to the implications of market irrationality and speculative bubbles. As for lessons for policy makers, we suggest that they give more consideration to the choice of their ultimate objectives, in particular to whether the current account should always be close to balance; to achieving better internal policies; and to the greater use of fiscal policy as a stabilization tool.
Topic:: International Relations, Economics, Globalization, and International Trade and Finance
Political Geography:: Europe

3117. Financial Centers and the Geography of Capital Flows

Author:: Francis E. Warnock and Chad Cleaver
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: We examine an assumption common in empirical work on bilateral portfolio capital flows that the countries the flows are attributed to are also the countries of the security's issuer, seller, or ultimate buyer. We do this by estimating U.S. investors' holdings of debt and equities in over 40 countries and, for the same countries, foreign investors' holdings of U.S. debt and equities. A comparison of our estimates with data from benchmark surveys provides insight into U.S. data on international debt and equity transactions. We find that, contrary to the common assumption, the data do not track the location of U.S. investment or the location of investors in U.S. assets very well. Because the U.S. portfolio flow data collection system was designed to measure cross-border transactions with foreign counterparties who are often intermediaries, the majority of the flows are attributed to financial centers. By aggregating our country-level estimates, we find that U.S. data accurately portray net inflows into U.S. equities and net outflows into foreign bonds. However, the data substantially overcount net inflows into U.S. bonds and may undercount net outflows into foreign equities. We conclude with a discussion of the implications of our findings for research on capital flows.
Topic:: International Relations, Economics, and International Trade and Finance
Political Geography:: United States

3118. Annual Industrial Capabilities Report to Congress, MAR 2002

Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Section 2504 of title 10, United States Code, requires that the Secretary of Defense submit an annual report to the Committee on Armed Services of the Senate and the Committee on Armed Services of the House of Representatives, by March 1st of each year. The report is to include:”(1) A description of the departmental guidance prepared pursuant to section 2506 of this title.(2) A description of the methods and analyses being undertaken by the Department of Defense alone or in cooperation with other Federal agencies, to identify and address concerns regarding technological and industrial capabilities of the national technology and industrial base.(3) A description of the assessments prepared pursuant to section 2505 of this title and other analyses used in developing the budget submission of the Department of Defense for the next fiscal year.(4) Identification of each program designed to sustain specific essential technological and industrial capabilities and processes of the national technology and industrial base.” This report contains the required information.
Topic:: Defense Policy, Economics, Industrial Policy, and Science and Technology
Political Geography:: United States

3119. Regional Influences on U.S. Monetary Policy: Some Implications for Europe

Author:: Ellen E. Meade and D. Nathan Sheets
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: This paper looks at the monetary policy decisions of the U.S. Federal Reserve and asks whether those decisions have been influenced solely by national concerns, or whether regional factors have played a role. All of the Federal Reserve's policymakers have some regional identity, i.e., either their positions explicitly carry some regional affiliation or their region of origin is a factor that must be considered in the selection process. This research is relevant for the Fed, and it may also be relevant for Europe's fledgling central bank in Frankfurt. Critics have asserted that ECB policymakers have an incentive to base policy on national developments and respond to national political pressures. We find that Fed policymakers do take into account developments in regional unemployment when deciding monetary policy, and that these regional developments are more important for central bankers at the hub than in the spokes. These findings are robust to a variety of different specifications of the voting equation.
Topic:: Economics and International Trade and Finance
Political Geography:: United States and Europe

3120. Identifying VARs Based on High Frequency Futures Data

Author:: Jonathan H. Wright, Jon Faust, and Eric Swanson
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Using the prices of federal funds futures contracts, we measure the impact of the surprise component of Federal Reserve policy decisions on the expected future trajectory of interest rates. We show how this information can be used to identify the effects of a monetary policy shock in a standard monetary policy VAR. This constitutes an alternative approach to identification that is quite different, and, we would argue, more plausible, than the conventional short-run restrictions. We find that the usual recursive identification of the model is rejected, but we nevertheless agree with the literature's conclusion that only a small fraction of the variance of output can be attributed to monetary policy shocks.
Topic:: Economics, Emerging Markets, and International Trade and Finance
Political Geography:: United States

3121. Inflation Targeting and Nominal Income Growth Targeting: When and Why Are They Suboptimal?

Author:: Dale W. Henderson and Jinill Kim
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: We derive optimal monetary stabilization rules and compare them to simple rules under both full and partial information. The nominal interest rate is the instrument of monetary policy. Special attention is devoted to inflation targeting and nominal-income-growth targeting. We use an optimizing-agent model of a closed economy which features monopolistic competition in both product and labor markets. A stabilization problem exists because there are one-period nominal contracts, either for wages alone or for both wages and prices, and three shocks that are unknown when contracts are signed. In order to highlight basic theoretical results, we deliberately keep our model simple enough that we can obtain exact solutions. Optimal rules maximize the expected utility of the representative agent subject to the information set of the policymaker. A key result, possibly surprising at first, is that even with monopolistic competition, the optimal full information policy makes the economy mimic the hypothetical equilibrium with flexible prices and wages. We explain why strict versions of inflation targeting, nominal income growth targeting, and other such simple rules are suboptimal under both full and partial information and derive flexible versions that are optimal under certain partial information assumptions. Nominal income growth targeting dominates inflation targeting for plausible parameter values.
Topic:: Economics, Emerging Markets, and International Trade and Finance
Political Geography:: United States

3122. On the Sequencing of Projects, Reputation Building, and Relationship Finance

Author:: David C. Smith, Steven Ongena, and Dominik Egli
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: We study the decision an entrepreneur faces in financing multiple projects and show that relationship financing will arise endogenously in an environment where strategic defaults are likely, even when firms have access to arm's-length financing. Relationship financing allows an entrepreneur to build a private reputation for repayment that reduces the cost of financing. However, in an environment where the risk of strategic default is low, the benefits from reputation building are outweighed by holdup rents extractable by the incumbent lender. Entrepreneurs then choose to finance projects from single or multiple arm's-length lenders.
Topic:: International Relations, Economics, and International Trade and Finance
Political Geography:: United States

3123. Determinants and Repercussions of the Composition of Capital Inflows

Author:: Mark Carlson and Leonardo Hernandez
Publication Date:: 01-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: The Mexican, Asian, and Russian crises of the mid- and late 1990s have renewed the interest among policymakers in the determinants and effects of private capital flows. This paper analyzes whether policies can affect the composition of capital inflows and whether different compositions aggravate crises. We find that, while fundamentals matter, capital controls can affect the mix of capital inflows that countries receive. We find that during the Asian crisis countries with more Yen denominated debt faired worse, while during the Mexican crisis larger short-term debt stocks increased the severity of the crisis.
Topic:: Conflict Resolution and Economics
Political Geography:: Russia, Asia, and North America

3124. Terrorism's Financial Lifeline: Can It be Severed?

Author:: Kimberley L. Thachuk
Publication Date:: 05-2002
Content Type:: Working Paper
Abstract:: To operate effectively, transnational terrorists and criminals need ready access to money and the ability to maneuver it quickly and secretly across borders. On a large scale, such money maneuvers can ripple across entire regions, embroiling global markets and threatening vital American economic interests as well as destabilizing other countries politically. The ability to move vast quantities of wealth rapidly and anonymously across the globe—sometimes combining modern-day wire transfers, faxes, and Internet connections with centuriesold practices, such as the hawala, of personal connections and a handshake—gives terrorist and criminal networks a strategic advantage over many states. Yet it also might be their vulnerability.
Topic:: Security, Defense Policy, Economics, and Terrorism
Political Geography:: America

3125. Inequalities in the Light of Globalization

Author:: Denis Goulet
Publication Date:: 08-2002
Content Type:: Working Paper
Institution:: Kroc Institute for International Peace Studies, University of Notre Dame
Abstract:: Shortly before his death last year (2001) the Brazilian geographer and philosopher Milton Santos published a book entitled For Another Globalization. The literary scholar and sociologist António Cândido praised him as one “in whose writings scientific rigor was never an obstacle to a developed social conscience.” And although Santos viewed globalization as a “perverse phenomenon” he strove “to show that it is possible to carry it out differently.” The Santos book is but one among many works now issuing from Brazil and calling for a qualitatively different kind of globalization. At the World Social Forum II organized around the theme “Another World is Possible” held in Porto Alegre, Brazil (31 January – 5 February, 2002), thousands of voices from 135 countries likewise launched appeals for Another Globalization. These were the voices of political and church leaders; of NGO's working on diverse fronts (human rights, economic justice, debt relief, environmental protection, gender equality, democratic governance, the Tobin tax, citizen participation in public decision-making, peace, struggles against social exclusion); of rural and urban labor unions; of organizations of the landless and the homeless. Across wide differences in ideology, substantive positions and emphasis, participants at Porto Alegre II nonetheless proclaimed common value allegiances to equity and social justice over maximum economic growth, to participatory decision-making over secretive elite institutional planning, to fair over free trade, to active protection of cultural diversity over uniform economic strategies, to re-empowerment of national states as decisive agents of development over subordination to international corporations or financial agencies. They counterposed these values to their opposites, which they attributed to the elite Davos World Economic Forum, held in New York this year in support of that battered city – maximum economic growth, unregulated capital mobility, free trade, privatization, and a uniform reliance on competitive markets to serve as the motor force of national development everywhere.
Topic:: Development, Economics, and Globalization
Political Geography:: New York and Brazil

3126. Precocious British Industrialization: A General Equilibrium Perspective

Author:: N.F.R. Crafts and C. Knick Harley
Publication Date:: 01-2002
Content Type:: Working Paper
Abstract:: The British industrial revolution created an industrial economy. While casual discourse conflates industrialization and economic growth, Britain was remarkable primarily for the pronounced structural change that occurred rather than for rapid economic growth. Uniquely the British labour force became highly industrialized even prior to the move to free trade in the 1840s. On the eve of the abolition of the Corn Laws the share of agriculture in employment had already declined to levels that were not reached in France and Germany until the 1950s.
Topic:: Economics and Industrial Policy
Political Geography:: Britain, Europe, France, and Germany

3127. Social Insurance Regimes: crises and 'reform' in the Argentine and Brazil, since c. 1900

Author:: Colin Lewis and Peter Lloyd-Sherlock
Publication Date:: 01-2002
Content Type:: Working Paper
Abstract:: The paper examines the structural and organisational problems of social insurance systems in Brazil and the Argentine in order to illuminate current debates about pension 'reform'. Much of the present discussion depicts social insurance 'crisis' as a modern phenomenon. Similarly, preoccupations about the macroeconomic objectives of reform - profitable pension funds as an adjunct to capital market deepening, about sustainability - the financial viability of systems, and about equity and coverage, are often assumed to be peculiar to the late twentieth century. The papers stresses the generational (or cyclical) nature of crises that have plagued social insurance regimes in both countries. It also identifies what may be learnt from differences, as well as similarities, between the two systems - not least the relatively larger historic role the private sector and earlier substantive provision for rural workers in Brazil. Following an appraisal of different 'models' (individual 'capitalised' accounts versus pay-as-you-go schemes and monopolistic state systems versus pluralistic/competitive arrangements), the paper concludes with an evaluation of the administrative and financial stability of current schemes.
Topic:: Economics, Government, and Industrial Policy
Political Geography:: Brazil, Argentina, South America, and Latin America

3128. The Argentine Implosion

Author:: Luigi Manzetti
Publication Date:: 11-2002
Content Type:: Working Paper
Institution:: The North-South Center, University of Miami
Abstract:: In December 2001, Argentina recorded the world's largest default ever, as it failed to honor payments on its US$132 billion foreign debt. Since then, five presidents have been in power, the Argentine peso has been devalued by 120 percent, and the banking system has virtually collapsed, dragging the economy into a depression. The gross domestic product (GDP) contracted 16.3 percent in the first quarter of 2002. Argentina's per capita income has become one of the worst in Latin America, and, as a result, more than one-third of its people live under the poverty line. 1 Argentines' confidence in their elected officials has disappeared. By most accounts, the country has literally imploded to a degree that has no precedent in Latin America's contemporary history. This is particularly bewildering, considering that only 10 years ago Argentina was hailed around the world as a model of successful economic reforms, with standards of living that were not only the highest in the region but comparable to those of some southern European countries. How could Argentina go from role model to international outcast so quickly? Some place the blame on external shocks created by the financial crises in Mexico (1995), Indonesia (1997), Thailand (1998), and Russia (1998). Others say the cause of the problem was misguided policy advice from the International Monetary Fund (Stiglitz 2002). Yet, most analyses ascribe much of the trouble to the Convertibility Law's fixed exchange rate policy adopted in 1991.
Topic:: Economics, Government, and International Trade and Finance
Political Geography:: Russia, Indonesia, Argentina, South America, Latin America, Mexico, and Thailand

3129. Divergence and dispersion in the Russian economy

Author:: Per Botolf Maurseth
Publication Date:: 12-2002
Content Type:: Working Paper
Institution:: Norwegian Institute of International Affairs
Abstract:: In the Soviet Union, one result of central planning was geographical decentralisation of economic activity to a large set of remote peripheral regions. For Russian post-Soviet regions an important question is whether centripetal market forces may alter the pre-existing industrial location. This paper addresses some aspects of regional economic development in Russia. The Russian economic landscape differs from what is common in market economies. Peripheral regions are generally richer than the average. During the 1990s, differences in gross regional product increased. These developments have also meant less spatial concentration of economic activity. During the last half of the 1990s, economic growth was higher in central regions than in the peripheries. If these trends continue, the Russian economic landscape will alter significantly in the future, with income per capita, total income and population being concentrated in economic central regions.
Topic:: Development, Economics, and Industrial Policy
Political Geography:: Russia and Soviet Union

3130. Economic Convergence through Savings, Trade and Technology Flows—Lessons from Recent Research

Author:: Per Botolf Maurseth
Publication Date:: 10-2002
Content Type:: Working Paper
Institution:: Norwegian Institute of International Affairs
Abstract:: This paper reviews the theoretical and empirical literature on income disparity between countries and convergence in economic growth. New theoretical models modify and often reverse the prediction of convergence in the traditional neo-classical model of economic growth. A particular feature of the recent literature as compared to traditional studies of economic growth is that it acknowledges interdependence between countries. International capital flows, trade in goods and (maybe most important) international technology flows influence individual countries growth performance. The empirical literature on the dynamics of the international distribution of income per capita reveals massive unconditional divergence in income levels. For sub-samples of countries on the other hand, the data support the conditional convergence hypothesis: when other factors are accounted for, there is a tendency for income per capita to converge. For the OECD countries, as well as for some other countries, knowledge flows, either embodied in traded goods or disembodied seem to be important for whether poorer countries are able to catch up with richer ones.
Topic:: International Relations, Economics, International Trade and Finance, and Science and Technology

3131. International R Spillovers and the Effect of Absorptive Capacity

Author:: Leo A. Grünfeld
Publication Date:: 08-2002
Content Type:: Working Paper
Institution:: Norwegian Institute of International Affairs
Abstract:: We study the productivity effects of R spillovers through imports, foreign direct investment and domestic intermediates, using a highly disaggregated data set for Norwegian business sectors. As opposed to the large body of similar studies, we explicitly analyse the importance of absorptive capacity effects, claiming that the positive contribution from R spillovers is an increasing function of the R activities of the economic units that receive the spillovers. We find strong support for the existence of R spillovers through imports and domestic intermediates, but no sign of such spillovers through foreign ownership. Surprisingly, we identify absorptive capacity effects relating to spillovers from imports, but no such effects with respect to domestic intermediates. One possible explanation is that the cost of learning from international R sources is larger than from domestic R sources, implying that own R investments can counteract the negative effect of geographical and cultural distance on R spillovers.
Topic:: International Relations, Economics, Industrial Policy, and International Trade and Finance
Political Geography:: Norway

3132. Multinationals Searching for R Spillovers

Author:: Leo A. Grünfeld
Publication Date:: 08-2002
Content Type:: Working Paper
Institution:: Norwegian Institute of International Affairs
Abstract:: This paper surveys the literature on R and technology spillovers as a motive for FDI. During the last years, a growing body of theoretical studies has generated formal arguments supporting the economic rationale for such behaviour. Yet, theoretical contributions are clustered within a few schools and a wider approach is necessary in order to understand the mechanisms that relate R spillovers to FDI. The empirical literature is more numerous, but provides ambiguous conclusions with respect to the strength of this motive. Micro studies provide less supportive results as compared to studies based on more aggregate data. Studies based on patent information are generally supportive to the existence of this motive.
Topic:: International Relations, Economics, International Trade and Finance, and Science and Technology

3133. International R Spillovers and the Absorptive Capacity of Multinationals

Author:: Leo A. Grünfeld
Publication Date:: 08-2002
Content Type:: Working Paper
Institution:: Norwegian Institute of International Affairs
Abstract:: This paper studies R spillovers as a motive for firms to go multinational. The establishment of a foreign subsidiary may increase a firm's ability to learn from foreign R activity since R spillovers between firms are moderated by geographical distance. As opposed to earlier studies on this subject, we also model the concept of absorptive capacity where spillovers are endogenised as a function of the firms'own R investments. We employ a three-stage Cournot duopoly model to identify under what conditions a firm chooses to service a foreign market through exports or localised production (going multinational). With exogenous R investments, the absorptive capacity effect contributes to increase the gains from going multinational when the firm is a technology leader in terms of R If R investments are endogenous, only medium-sized absorptive capacity effects will result in firms going multinational. Also, higher spillover rates do not necessarily drive down R and profits for the multinational firm. This stands in contrast to models that ignore the aspect of absorptive capacity.
Topic:: International Relations, Economics, International Trade and Finance, and Science and Technology

3134. Immigrant Well-Being in New York and Los Angeles

Author:: Randy Capps and Michael E. Fix
Publication Date:: 08-2002
Content Type:: Working Paper
Institution:: Urban Institute
Abstract:: Despite their strong attachment to the labor force, large numbers of immigrants and their families in New York and Los Angeles have low incomes, lack health insurance, and are food insecure. The most powerful predictor of poverty and hardship is their limited English skills. Legal immigrants arriving after welfare reform's enactment in 1996—who have the most restricted access to public benefits—are poorer than immigrants arriving before the law's enactment.
Topic:: Economics, Human Welfare, and Migration
Political Geography:: United States and New York

3135. The Community Capacity Fund: Understanding its Role in Strengthening the Washington, D.C. Region After 9/11

Author:: Rachel Mosher-Williams
Publication Date:: 09-2002
Content Type:: Working Paper
Institution:: Urban Institute
Abstract:: The Community Capacity Fund (CCF), a program of Washington Grantmakers, is acknowledged as a new model of national funding for local, collaborative grantmaking. In the face of serious community needs and concerns post–September 11, 2001, as well as many potential ways to address those needs, the Fund developed a framework for strengthening the ability of nonprofits to respond to the terrorist attacks. An investment by the Ford Foundation (and, ultimately, several other funders) in the Washington, D.C., region's recovery enabled a large group of experienced local grant makers and nonprofit leaders to jointly translate that framework into action. Within less than a year, CCF awarded $1,400,055 in grants to organizations advocating for and reemploying workers dislocated by September 11, as well as to organizations developing cross-jurisdictional efforts to respond to future disasters.
Topic:: Economics, Human Welfare, and Non-Governmental Organization
Political Geography:: United States and Washington

3136. Measuring Unemployment Benefit Recipiency in New Zealand

Author:: Wayne Vroman
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Urban Institute
Abstract:: This is a paper about measurement. It originated within a project that is examining the performance of unemployment compensation (UC) programs from a cross-national perspective. At the current time the larger project has assembled data on the UC programs of more than 20 countries along with supporting labor market data. Within the set of OECD countries, the project has singled out for particular attention six English speaking countries: Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States. An analysis of the unemployment protection systems in these six countries was recently completed by Brusentsev (2002).
Topic:: Economics, Government, and Human Welfare
Political Geography:: United States, United Kingdom, Canada, Australia, Ireland, and New Zealand

3137. Regulatory Europeanization, National Autonomy and Regulatory Effectiveness: Marketing Authorization for Pharmaceuticals

Author:: Jürgen Feick
Publication Date:: 11-2002
Content Type:: Working Paper
Institution:: Max Planck Institute for the Study of Societies
Abstract:: The EC harmonized market entry regulation for pharmaceuticals from the early sixties on, but it achieved neither its goal of uniform national regulatory decisions nor that of automatic mutual recognition. Subsequent attempts to Europeanize the procedures themselves resulted in two alternatives in 1995: a Centralized Procedure for innovative pharmaceutical products implemented at the EU level, and a Decentralized Procedure which tries to assure mutual recognition. First, the paper analyzes the distinctive modes of Europeanization employed in these regulatory alternatives, examining both their impact on the effectiveness of European governing and the balance they strike between European interventionism, national participation and national autonomy. Second, it tries to assess whether Europeanization furthers the goals of pharmaceutical market entry policy as defined in European regulations – public health protection, creation of a single market and the reduction of regulatory costs to industry. There is little evidence that the public's health is less well protected when regulation is Europeanized. Only the Centralized Procedure contributes significantly to the goal of establishing a single market. Regulatory costs in terms of approval time did go down especially for pharmaceutical firms using the Centralized Procedure, mainly because of efficiency-enhancing legal provisions and institutionally induced regulatory competition between national authorities.
Topic:: Economics, International Trade and Finance, and Science and Technology
Political Geography:: Europe

3138. The European Social Model: Coping with the Challenges of Diversity

Author:: Fritz W. Scharpf
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Max Planck Institute for the Study of Societies
Abstract:: European integration has created a constitutional asymmetry between policies promoting market efficiencies and policies promoting social protection and equality. National welfare states are legally and economically constrained by European rules of economic integration, liberalization, and competition law, whereas efforts to adopt European social policies are politically impeded by the diversity of national welfare states, differing not only in levels of economic development and hence in their ability to pay for social transfers and services but, even more significantly, in their normative aspirations and institutional structures. In response, the "Open Method of Coordination" is now applied being in the social-policy field. It leaves effective policy choices at the national level, but tries to improve these through promoting common objectives and common indicators and through comparative evaluations of national policy performance. These efforts are useful but cannot overcome the constitutional asymmetry. Hence there is reason to search for solutions which must have the character of European law in order to establish constitutional parity with the rules of European economic integration, but which also must be sufficiently differentiated to accommodate the existing diversity of national welfare regimes. The article discusses two such options, "Closer Cooperation" and a combination of differentiated "framework directives" with the Open Method of Coordination.
Topic:: Civil Society, Economics, and Political Economy
Political Geography:: Europe

3139. Breaking the Path of Institutional Development? Alternatives to the New Determinism

Author:: Colin Crouch and Henry Farrell
Publication Date:: 06-2002
Content Type:: Working Paper
Institution:: Max Planck Institute for the Study of Societies
Abstract:: The concept of path dependence is being used in highly deterministic ways in neo-institutionalist analysis, so that studies using this framework have difficulty in accounting for, or predicting, change. However, the original Polya urn model from which path dependence theory draws predicts that alternative paths will be possible. It can be argued that actors will be able to use these when they perceive a need to change. This article seeks to capture this possibility through accommodating a Bayesian parametric decision maker, interacting with an environment. This makes it possible to examine how change may involve such processes as: the use of past or redundant institutional repertoires; transfer of experience across action spaces; or from other agents, through networks of structured relationships; the emergence of perceived “one best” solutions. This approach points to the need to change how typologies are used in neo-institutionalist research, so that those features of cases which do not fit the pre-conceived framework of a type are not disregarded as “noise”, but properly evaluated as potential resources for change.
Topic:: Economics, Emerging Markets, and International Trade and Finance

3140. How Reliable is Pooled Analysis in Political Economy? The Globalization-Welfare State Nexus Revisited

Author:: Bernhard Kittel and Hannes Winner
Publication Date:: 05-2002
Content Type:: Working Paper
Institution:: Max Planck Institute for the Study of Societies
Abstract:: Panel data analysis has become very popular in comparative political economy. However, in order to draw meaningful inferences from such data, one has to address specification and estimation issues carefully. This paper aims to demonstrate various pitfalls that typically occur in applied empirical work. To illustrate this, we refer to the debate on the globalization-welfare state nexus. We reexamine a model by Garrett and Mitchell (2001), a leading study in this regard. Utilizing a data set of 17 OECD countries and the time period 1961 to 1993, they find evidence that globalization and partisan composition have a significant impact on the extent of public activity. However, because they apply a dynamic specification in levels, they do not adequately take into account both the dynamic and spherical nature of the data. In contrast, we propose an autoregressive model in first differences that is shown to perform well in statistical terms. Further, we explicitly pay attention to the time pattern of the globalization-welfare state nexus. Substantively, we find evidence that government spending is primarily driven by the state of the domestic economy. Neither partisan effects nor the international economic environment have affected public expenditure considerably.
Topic:: Economics, Globalization, International Trade and Finance, and Political Economy

3141. Political Parties, Institutions, and the Dynamics of Social Expenditure in Times of Austerity

Author:: Herbert Obinger and Bernhard Kittel
Publication Date:: 01-2002
Content Type:: Working Paper
Institution:: Max Planck Institute for the Study of Societies
Abstract:: The containment of social expenditure growth has been (and still is) a core issue of public policy in advanced industrial countries since the 1980s and has received much academic attention during that period. Among the most extensively discussed explanatory factors of social expenditure are partisan politics and political institutions, as well as the dependency of the real impact of the former on the latter. The paper distinguishes five competing theoretical perspectives and explores their power to explain the empirical variation in the period 1982–1997 in 21 OECD countries. The empirical analysis of short-term dynamics is performed in a time-series cross-section framework while long-term level effects are explored in a cross-sectional setting. By using an interactive model specification the authors show that there is empirical evidence for this conditional effect, albeit it is neither thoroughly convincing nor leading to lasting long-term level effects. Extensive specification tests show that the 1990s witnessed a weakening of partisan effects which were still present in the 1980s. In total, the evidence tends to give most support to the “growth-to-limits” and the “new politics” perspectives.
Topic:: Economics, Government, International Trade and Finance, and Political Economy

3142. Non-Cooperative Dynamics of Multi-Agent Teams

Author:: Robert L. Axtell
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: The Brookings Institution
Abstract:: Results on the formation of multi-agent teams are reviewed and extended. Conditions are specified under which it is individually rational for agents to spontaneously form coalitions in order to engage in collective action. In a cooperative setting the formation of such groups is to be expected. Here we show that in non-cooperative environments—presumably a more realistic context for a variety of both human and software agents—self-organized coalitions are capable of extracting welfare improvements. The Nash equilibria of these coalitional formation games are demonstrated to always exist and be unique. Certain free rider problems in such group formation dynamics lead to the possibility of dynamically unstable Nash equilibria, depending on the nature of intra-group compensation and coalition size. Yet coherent groups can still form, if only temporarily, as demonstrated by computational experiments. Such groups of agents can be either long-lived or transient. The macroscopic structure of these emergent 'bands' of agents is stationary in sufficiently large populations, despite constant adaptation at the agent level. It is argued that assumptions concerning attainment of agent-level (Nash) equilibrium, so ubiquitous in conventional economics and game theory, are difficult to justify behaviorally and highly restrictive theoretically, and are thus unlikely to serve either as fertile design objectives or robust operating principles for realistic multi-agent systems.
Topic:: Economics and International Trade and Finance
Political Geography:: United States and Latin America

3143. Spatial and Temporal Patterns in Civil Violence: Guatemala 1977-1986

Author:: Timothy R. Gulden
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: The Brookings Institution
Abstract:: This paper examines detailed records from the civil conflict in Guatemala between 1977 and 1986. It reveals a number of novel patterns which support the use of complex systems methods for understanding civil violence. It finds a surprising, non-linear relationship between ethnic mix and killing; thereby inviting analysis based on group dynamics. It shows the temporal texture of the conflict to be far from smooth, with a power spectrum that closely resembles that of other, better understood, complex systems. The distribution of incident sizes within the data seems to fall into two distinct sets, one of which, corresponding to "regular" conflict, is Zipf distributed, the other of which includes acts of genocide and is distributed differently. This difference may indicate that that agents of the state were proceeding under different types of orders. These results provide an empirical benchmark for the modeling of civil violence and may have implications for conflict prevention, peace keeping, and the post-conflict analysis of command structures.
Topic:: Economics and International Trade and Finance
Political Geography:: United States, Latin America, Central America, and Guatemala

3144. Russia's Decline and Uncertain Recovery

Author:: Thomas E. Jr. Graham
Publication Date:: 05-2002
Content Type:: Working Paper
Institution:: Carnegie Endowment for International Peace
Abstract:: For much of the first decade after the collapse of the Soviet Union, the issue of reform—of transition to free-market democracy—dominated discussions of Russia in Russia itself and in the West. Russian president Boris Yeltsin advocated reform; Western governments declared their support and offered their assistance. This was particularly true of the U.S. government. President Clinton's administration came into office in 1993 determined to assist Russia in its transformation into “a normal, modern state—democratic in its governance, abiding by its own constitution and by its own laws, market-oriented and prosperous in its economic development, at peace with itself and the rest of the world,” as deputy secretary of state Strobe Talbott, the chief architect of the U.S. administration's Russia policy, was wont to put it.
Topic:: Economics and Government
Political Geography:: Russia, United States, Europe, Asia, and Soviet Union

3145. Fixing Argentina

Author:: Kurt Schuler
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: The Cato Institute
Abstract:: Argentina's currency crisis and economic depression have been caused by the bad policies of its government—not by banks, speculators, the International Monetary Fund (despite the bad advice it has given), or other scapegoats. The De la Rúa and Duhalde governments have made several gigantic blunders, namely, increasing tax rates, freezing bank deposits, devaluing the peso, and forcibly converting dollar bank deposits and contracts into pesos (“pesofication”).
Topic:: Economics, Globalization, and Political Economy
Political Geography:: Argentina, South America, and Latin America

3146. Rethinking the Export-Import Bank

Author:: Aaron Lukas and Ian Vásquez
Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: The Cato Institute
Abstract:: The Export-Import Bank of the United States (Ex-Im Bank) was created in 1934 as an independent federal agency operating under a renewable congressional charter. That charter most recently expired on September 30, 2001. Since then, the Ex-Im Bank has been operating under a series of continuing resolutions set to expire on March 31, 2002.
Topic:: Economics and International Trade and Finance
Political Geography:: United States

3147. Tax Reforms and "Modell Deutschland": Lessons from Four Years of Red-Green Tax-Policy

Author:: Achim Truger and Wade Jacoby
Publication Date:: 12-2002
Content Type:: Working Paper
Institution:: Institute of European Studies (IES), UC Berkeley
Abstract:: When the red-green (SPD-Bündnis90/DieGrünen) coalition took over the federal government from the Christian-Democrat/Free-Democrat (CDU/CSU/FDP) coalition in 1998, tax reforms had a very high political priority. And, in fact, the government pushed through an astonishing number of far-reaching tax reforms/tax changes within a period of little more than two years. This paper follows two aims. First, it gives a short description of the measures taken and evaluates them with respect to tax theory and the German tax reform debate of the 1990s. Second, it explicitly addresses the question whether the tax changes were influenced by the wish to reform the Modell Deutschland, i.e. whether something substantial was done to change Germany ́s status as a perceived high tax country and if so, whether the attempt was successful. It will be shown that even though the problem of high taxes might have been many observers ́ and, indeed, also the government ́s dominant concern, there was much more to the German debate. The chapter will also ask whether generously cutting taxes was the right thing to do. It demonstrates that under Germany ́s peculiar economic and institutional circumstances at the end of the 1990s, the attempt to cut taxes led to serious problems for fiscal policy, growth, and employment.
Topic:: Economics, Government, and Political Economy
Political Geography:: Europe

3148. Lessons of the Euro for the Rest of the World

Author:: Barry Eichengreen
Publication Date:: 12-2002
Content Type:: Working Paper
Institution:: Institute of European Studies (IES), UC Berkeley
Abstract:: Europe's single currency is widely invoked as a potential solution to the monetary and exchange rate problems of other regions, including Asia, Latin America, North America and even Africa. This lecture asks whether the Europe's experience in creating the euro is exportable. It argues that the single currency is the result of a larger integrationist project that has political as well as economic dimensions. The appetite for political integration being less in other parts of the world, the euro will not be easily emulated. Other regions will have to find different means of addressing the tension between domestic monetary autonomy and regional integration. Harmonized inflation targeting may be the best available solution.
Topic:: Economics, International Trade and Finance, and Political Economy
Political Geography:: Africa, Europe, Asia, and Latin America

3149. The Enlargement Challenge: Can Monetary Union be Made to Work in an EU of 25 Members?

Author:: Barry Eichengreen
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: Institute of European Studies (IES), UC Berkeley
Abstract:: This lecture considers how Europe's monetary union will evolve in the next five to ten years. It concentrates on what is likely to be the most important change in that period, namely, the increasing number and heterogeneity of participating states. By 2006, less than four years from now, it is virtually certain that EMU will be enlarged to include a number of Eastern European countries that have not yet been admitted to the EU itself. These new members will differ sharply from the incumbents in terms of their economic structures, their per capita incomes, and their growth rates. The analysis focuses on the implications of this momentous change for the structure, organization and operation of EMU.
Topic:: Economics and Political Economy
Political Geography:: Europe

3150. Art, Technology and Intellectual Property

Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: American Assembly at Columbia University
Abstract:: At the close of their discussions, the participants in the 100th American Assembly on "Art, Technology, and Intellectual Property," at Arden House, Harriman, New York, February 7-10, 2002, reviewed as a group the following statement. While the statement represents general agreement, no one was asked to sign it. Furthermore, it should be understood that not everyone agreed with all of it, and some vigorously disagreed with some of it.
Topic:: Economics, Education, and Science and Technology
Political Geography:: United States, New York, and America

3151. Political Office, Kinship, and Household Wealth in Rural China

Author:: Andrew G. Walder and Litao Zhao
Publication Date:: 12-2002
Content Type:: Working Paper
Institution:: Walter H. Shorenstein Asia-Pacific Research Center
Abstract:: For more than two decades after the demise of Maoist collectivism, a resurgent market economy has deeply transformed the social structure of rural China. By the mid-1980s, peasant households had already returned to historical marketing patterns of agricultural produce and other sidelines and services. By the turn of the century, almost 140 million individuals, or 30 percent of the rural labor force, earned regular incomes from wage labor outside agriculture. Twenty million rural households had registered individual family enterprises, and two million of them had already grown into substantial private firms. A massive rural industrial sector grew up under public ownership in the 1980s, employing more than 80 million at its height. It was then extensively privatized in the 1990s, and is now less than half its former size. While these developments have been widely noted in studies of rural industrialization and income inequality, it is still far from clear how they have altered the structure and wealth of village political and economic elites.
Topic:: Communism, Economics, and Politics
Political Geography:: China and Asia

3152. The Growth of Broadband Internet Connections in South Korea: Contributing Factors

Author:: Kyounglim Yun, Heejin Lee, and So-Hye Lim
Publication Date:: 09-2002
Content Type:: Working Paper
Institution:: Walter H. Shorenstein Asia-Pacific Research Center
Abstract:: In recent years, Korea has seen a remarkable diffusion in broadband Internet connections. This paper explores the actions and factors contributing to this diffusion from three viewpoints: public sector, private sector, and social. We suggest that the matching of demand and supply is the most important factor in the fast diffusion of broadband in Korea. In particular, fierce infrastructure competition has led to quality services at a low fixed price. We also consider two challenges that lie ahead: take-up of retail e-commerce applications, and the need to bridge the digital divide.
Topic:: Economics, International Trade and Finance, and Science and Technology
Political Geography:: Asia, South Korea, and Korea

3153. Privatization and Elite Mobility: Rural China, 1979-1996

Author:: Andrew G. Walder
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Walter H. Shorenstein Asia-Pacific Research Center
Abstract:: The ideal types that motivate research on transitional economies have led to a neglect of the varied mechanisms that generate social change. One example is the implicit treatment of privatization as a single process whose initial impact will become more pronounced through time. Privatization in fact occurs via distinct mechanisms that have different consequences across types of assets and through time, as shown in an analysis of career trajectories over two decades in rural China. During the first decade, when privatization proceeded via the rapid expansion of household enterprise, ordinary individuals with nonagricultural work experience were the most likely to become private entrepreneurs. Village officials, their relatives, and public enterprise managers did not enter the private sector at rates higher than others. However, during the second decade the privatization of public enterprises began to transfer collective assets to individual ownership. During this period, public enterprise managers and the relatives of cadres emerged as the most likely to become private entrepreneurs. Private entrepreneurs, however, have yet to move into cadre posts, and cadres have yet to move into private entrepreneurship, at rates higher than others. Administrative elites have therefore proven resilient in the face of private-sector expansion, and the benefits of privatization have gradually shifted in their favor.
Topic:: Communism and Economics
Political Geography:: China and Asia

3154. Foreign Penetration of Japan's Investment-Banking Market: Will Japan Experience the "Wimbledon Effect"?

Author:: Nicole Pole
Publication Date:: 07-2002
Content Type:: Working Paper
Institution:: Walter H. Shorenstein Asia-Pacific Research Center
Abstract:: Foreign banks have long faced difficulties in attempting to enter certain Japanese financial markets. This is due partly to regulatory practices and partly to specific Japanese socioeconomic conditions, for instance the system of relationship banking. While retail banking is still a sector in which almost no foreigners have been able to succeed, some foreign financial institutions have been able to gain market share in investment and wholesale banking.
Topic:: Economics and International Trade and Finance
Political Geography:: Japan, Israel, East Asia, and Asia

3155. U.S. Policy in the Andean Region

Author:: Michael Shifter
Publication Date:: 11-2002
Content Type:: Working Paper
Institution:: Aspen Institute
Abstract:: Even within Latin America's generally gloomy economic and political outlook, the countries of the Andean region—Colombia, Venezuela, Peru, Ecuador and Bolivia—stand out as especially problematic and unsettled. For the United States, this set of countries, with some 120 million citizens, poses enormous policy challenges. Fostering democracy, expanding trade, combating drugs, promoting stability, and advancing social development are just some of the challenges germane to this region which, in the context of globalization, post-September 11, become even more compelling.
Topic:: Foreign Policy, Economics, and Government
Political Geography:: United States, Colombia, South America, Latin America, Venezuela, Peru, Ecuador, and Bolivia

3156. America and the Global Energy Challenge

Author:: Hal Harvey
Publication Date:: 06-2002
Content Type:: Working Paper
Institution:: Aspen Institute
Abstract:: Energy is at once the lifeblood and the bane of the modern world. Fossil energy has fueled tremendous economic growth over the past 150 years. The economic history of the United States is largely the history of extracting and using coal and oil. At the same time, the profligate use of these energy sources has created the world's most pressing environmental problems, and led to major national security concerns for the United States. Energy consumption is the primary source of greenhouse gas emissions, smog, acid rain, oil spills, and nuclear waste. American dependence on oil from the Middle East forces our hand on foreign policy and imposes high economic and human costs. It is becoming increasingly clear that America's—and the world's—current diet of fossil energy is not sustainable.
Topic:: Economics, Environment, Science and Technology, and Treaties and Agreements
Political Geography:: United States, America, and Middle East

3157. How Shareholder Reforms Can Pay Foreign Policy Dividends

Author:: James J. Shinn and Peter Gourevitch
Publication Date:: 06-2002
Content Type:: Working Paper
Institution:: Council on Foreign Relations
Abstract:: Corporate governance—the rules that govern the relationship between managers and shareholders—belongs on the foreign policy agenda of American decision-makers. The vigorous debates underway about corporate governance, both at home and abroad, present an opportunity for the United States to advance its foreign policy goals of enhancing free trade and financial stability.
Topic:: Foreign Policy, Economics, Government, Industrial Policy, and International Trade and Finance
Political Geography:: United States

3158. Monetary Policy Rules and the International Monetary Transmission

Author:: Leonor Coutinho
Publication Date:: 10-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: This paper analyses alternative monetary policy rules for the ECB, using a two "country" model of the euro area and the US, that assumes monopolistic competition, sticky prices and optimizing agents. The alternative rules analyzed for the ECB are ranked by their ability to stabilize consumption, output, and inflation and maximize consumers' welfare. The analysis contributes toward understanding the trade-offs faced by policymakers in open economies and provides some support for the current design of the ECB's operational framework. The results suggest that stabilizing money-growth, in addition to inflation, gives an additional degree of freedom to stabilize output. Although price stability is likely to remain the primary objective of the ECB, monetary policy must "without prejudice of price stability (...) support the general economic policies in the Community..." (Article 2). Hence monitoring money, under certain assumptions about the shocks hitting the economy, may deliver a better outcome in terms of output stabilization which should allow the ECB to fulfill its secondary but nonetheless important commitment.
Topic:: Economics, Government, and International Trade and Finance
Political Geography:: United States

3159. Estimating the Effects of Fiscal Policy in OECD Countries

Author:: Roberto Perotti
Publication Date:: 10-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: This paper studies the effects of fiscal policy on GDP, prices and interest rates in 5 OECD countries, using a structural Vector Autoregression approach. Its main results can be summarized as follows:1 ) The estimated effects of fiscal policy on GDP tend to be small: positive government spending multipliers larger than 1 tend to be the exception; 2) The effects of fiscal policy on GDP and its components have become substantially weaker over time; 3) Under plausible values of the price elasticity, government spending has positive effects on the price level, although usually small; 4) Government spending shocks have significant effects on the nominal and real short interest rate, but of varying signs; 5) In the post-1980 period, net tax shocks have positive short run effects on the nominal interest rate, and typically negative or zero effects on prices; 6) The US is an outlier in many dimensions; responses to fiscal shocks estimated on US data are often not representative of the average OECD country included in this sample.
Topic:: Economics and Government
Political Geography:: United States and Europe

3160. Improving the Governance of European Foreign Aid: Development Co-Operation as an Element of Foreign Policy

Author:: Carlos Santiso
Publication Date:: 10-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: Should European Union (EU) member states 're-nationalise' foreign aid? Considering the dismal record of the aid managed by the European Commission, this is a legitimate question that European leaders nevertheless seem unwilling to address seriously. Like in America, there is heightened debate across Europe on the purpose of the aid it provides to developing countries. The current debates on poverty reduction, debt relief and, more broadly, the effectiveness of development assistance have brought renewed light on foreign aid.
Topic:: Foreign Policy, Development, and Economics
Political Geography:: America and Europe

3161. The Economic Impact of Enlargement on the European Economy: Problems and Perspectives

Author:: Paul Brenton
Publication Date:: 10-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: Much of the attention on the economic aspects of the forthcoming enlargement of the EU have concentrated upon the high-profile issues which are linked to the level of relative economic development in the acceding countries; the perceived threat of large-scale migration and the budgetary costs arising from implementation of EU agricultural and regional policies. This paper briefly discusses that these are not insurmountable problems and stresses that the main difficulties from the next enlargement may arise from the effective inclusion of the acceding countries into the Single Market, the microeconomic hub of the EU. We discuss that the process of regulatory harmonisation will become more difficult in an EU of 25 or more members, which entails greater emphasis on the principle of mutual recognition as the main tool for ensuring freedom of movement of goods and services. However, mutual recognition has its limits and is likely to be less effective the more diverse the countries involved.
Topic:: Economics and International Trade and Finance
Political Geography:: Europe

3162. Outsourcing and Inequality

Author:: Paul Brenton, Bob Anderton, and Eva Oscarsson
Publication Date:: 10-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: This paper brings together and analyses the results of empirical analyses which, in contrast to most other studies, find that trade has been a significant cause of labour market inequality in various industrialised countries. The approach is based upon the concept of outsourcing – whereby the low-skill parts of the production chain are 'outsourced' to low-wage countries. A distinguishing feature of the empirical work is the use of highly detailed trade data, which allow imports from high- and low-wage countries to be separately identified at the industry level. Using cost minimisation framework, we show that imports from low-wage countries have made a significant contribution to the decline in the wage-bill share and/or relative employment of less-skilled workers in the UK, the USA, Sweden and Italy. We also show how the country-specific characteristics of outsourcing can lead to quite different inequality outcomes in different countries. In line with other studies, we also find that technology has played an important role in causing the increase in inequality in many countries. However, there is also some evidence that some of the rapid increase in the application of new technologies in recent decades has been trade-induced through mechanisms such as 'defensive innovation'.
Topic:: Economics, Industrial Policy, International Trade and Finance, and Science and Technology
Political Geography:: United States and United Kingdom

3163. Who Needs Foreign Banks?

Author:: Daniel Gros
Publication Date:: 09-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: This paper shows that countries with weak banking system and fiscal institutions, might benefit from the presence of foreign banks, which can constitute a commitment and transparency device. Foreign banks can also reduce the probability of self-fulfilling speculative attacks. A strong presence of foreign banks can make a currency peg feasible in the first place by rendering it more resistant to speculative attacks. The European experience is instructive in this respect. In all of the candidate countries from Central and Eastern Europe (CEEC) the banking system is now dominated by foreign banks. This is now taken for granted, but it is unusual if one looks at the existing EU-15 members, where foreign banks play a marginal role in even the smallest economies.
Topic:: Economics and International Trade and Finance
Political Geography:: Europe

3164. Interdependent Growth in the EU: The Role of Trade

Author:: María Garcia-Vega and José A. Herce
Publication Date:: 08-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: After properly modelling growth externalities and using spatial econometric techniques we investigate whether economic integration promotes interdependent growth among countries. We conclude that this has been indeed the case for advanced OECD countries and that, for those countries belonging to the EU, through successive enlargements, the effect has been even stronger. More precisely, if every (trade) partner of a given country experiences an extra growth of 1 percentage point, this economy will profit from an extra 0.5 point, and if this country belongs to the EU it will have an additional increase of its rate of growth of 0.2 points. Both figures can be interpreted as growth externalities with the latter suggesting that an integration process like the one followed by the EU has an (positive) effect on growth.
Topic:: Economics and International Trade and Finance
Political Geography:: Europe

3165. Making EU Trade Agreements Work: The Role of Rules of Origin

Author:: Paul Brenton and Miriam Manchin
Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: A key element of the EU's free trade and preferential trade agreements is the extent to which they deliver improved market access and so contribute to the EUs foreign policy objectives towards developing countries and neighbouring countries in Europe, including the countries of the Balkans. Previous preferential trade schemes have been ineffective in delivering improved access to the EU market. The main reason for this is probably the very restrictive rules of origin that the EU imposes, coupled with the costs of proving consistency with these rules. If the EU wants the 'Everything but Arms' agreement and free trade agreements with countries in the Balkans to generate substantial improvements in access to the EU market for products from these countries then it will have to reconsider the current rules of origin and implement less restrictive rules backed upon by a careful safeguards policy.
Topic:: Foreign Policy, Economics, Government, Human Rights, International Trade and Finance, Migration, and Political Economy
Political Geography:: Europe and Balkans

3166. The Development of European Citizenship and its Relevance to the Integration of Refugees

Author:: Joanna Apap
Publication Date:: 01-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: Achieving an integrated Europe involves political and social unity as much as economic integration. Thus, the issue of European citizenship is central to the debate about European integration. Union citizenship needs to be distinguished from national citizen ship. Every citizen of the Union enjoys a first circle of nationality rights within a member state and a second circle of new rights enjoyed in any member state of the EU. The presence of immigrants in Europe also raises wider questions for government policy in the field of citizenship. There are various issues that arise in the European context with respect to the boundaries of citizenship. One of the main questions in this regard is the extent to which the division between European Union citizens and third country nationals will continue to prevail.
Topic:: Economics, Government, Human Rights, International Trade and Finance, Migration, and Political Economy
Political Geography:: Europe

3167. Consumer Credit Rates in the Eurozone: Evidence on the Emergence of a Single Retail Banking Market

Author:: Stefanie Kleimeier and Harald Sander
Publication Date:: 01-2002
Content Type:: Working Paper
Institution:: Centre for European Policy Studies (CEPS)
Abstract:: This study provides new evidence on the emergence of a single eurozone retail banking market with particular reference to consumer credit. Given the heterogeneous nature of consumer credit products in the eurozone, the authors reject the earlier proposition of the Cecchini study, which equates banking market integration with identical interest rates throughout the eurozone. The present study advocates the use of the co-integration methodology, which allows us to investigate integration in the presence of country-specific credit rates. The empirical results indicate only very limited evidence of an integrated retail banking market prior to 1 January 1999, pointing to the limited effectiveness of the single market cum Second Banking Directive in particular in integrating consumer credit markets.
Topic:: Economics and Political Economy
Political Geography:: Europe

3168. The Measure of India: What Makes Greatness?

Author:: Joydeep Mukherji
Publication Date:: 11-2002
Content Type:: Working Paper
Institution:: Center for the Advanced Study of India
Abstract:: I join you tonight to consider India on the scales of greatness. In other words, to ask: by what standards do people regard a state as great? And how does India conform to those standards? I must say at the outset, that these are not questions on which I personally would fixate. Greatness in terms of power is not a standard that moves me as a human being. My impulse when looking at countries is to say, “what's so great about being great?” I think a country's taxi drivers tell us more about it than the number of nuclear bombs it might possess. The number of Ph.D. holders, engineers, and writers driving taxicabs in a country, and where they came from, tells me a lot about the country we're in and the country from whence they came. The taxi driver in Iran who complains bitterly about the ayatollahs and wants to talk about pop music and freedom, tells me something about Iran. The engineer who fled Nigeria for the opportunity possible in America, even if it's driving a cab, tells me something about Nigeria and the U.S. Great power has little to do with it.
Topic:: Economics and Industrial Policy
Political Geography:: America, Iran, South Asia, India, and Nigeria

3169. India's Slow Conversion to Market Economics

Author:: Joydeep Mukherji
Publication Date:: 11-2002
Content Type:: Working Paper
Institution:: Center for the Advanced Study of India
Abstract:: According to the Bible, Saul of Tarsus converted almost instantly to Christianity on the road to Damascus. Subsequently, he neither ate nor drank for three days. The conversion of the world's second largest country, India, to a new way of life based on free markets and private enterprise will not be so rapid or disruptive. Nevertheless, India's conversion to market economics will, like Saul's, be thorough and deep. It will increasingly affect all of us in the global village, in which Indians constitute 17% of the inhabitants.
Topic:: Economics and Industrial Policy
Political Geography:: South Asia and India

3170. Privatization: From Policy Formulation to Implementation: The View from the Inside

Author:: Montek Singh Ahluwalia
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: Center for the Advanced Study of India
Abstract:: It is both a privilege and a pleasure for me to deliver this year's Annual Fellows Lecture at the Center for Advanced Study of India. For many years in India, I used to receive an annual update on the activities of the Center when Dr. Francine Frankel visited Delhi and it is therefore particularly pleasant to visit the Center in person.
Topic:: Economics and Industrial Policy
Political Geography:: South Asia, India, and New Delhi

3171. Crime, Terror and the Central Asia Drug Trade

Author:: Tamara Makarenko
Publication Date:: 06-2002
Content Type:: Working Paper
Institution:: Centre for the Study of Terrorism and Political Violence, St. Andrews University, Scotland
Abstract:: Over the last decade, opium poppy cultivation in Afghanistan has been rising incrementally, culminating in a bumper crop in 1999 that produced approximately 80 percent of the global supply of illicit opium. Despite this predicament, the dynamics of the illicit drugs trade in Afghanistan has received little attention. Most media reports and government statements over-simplify the situation, making it appear as though the Taliban controlled the planting, cultivation, production and trafficking of all opiates. For example, The Times, in an article published in January 2000, reported “The Taliban rulers of Afghanistan have become the world's biggest producers and smugglers of hard drugs, overtaking rings in Colombia and Burma. They are now responsible for 95 per cent of all the heroin entering Britain.” Following the September 11 attacks, this responsibility was shared with Usama bin Laden and the Al-Qaeda network. British Prime Minister Tony Blair thus stated that the “arms the Taliban are buying today are paid for with the lives of young British people buying their drugs on British streets”, and subsequently added that the Taliban and Usama bin Laden “jointly exploited the drugs trade.” This view has also been propagated in the United States by leading news agencies. CNN, for example, explicitly reported that the Taliban both taxed and trafficked in narcotics, which were directly used to finance their military operations.
Topic:: Crime, Economics, and Terrorism
Political Geography:: Britain, Afghanistan, Central Asia, Taliban, Colombia, and Burma

3172. Terrorism and Transnational Organised Crime: the emerging nexus

Author:: Tamara Makarenko
Publication Date:: 06-2002
Content Type:: Working Paper
Institution:: Centre for the Study of Terrorism and Political Violence, St. Andrews University, Scotland
Abstract:: The end of the Cold War and subsequent demise of the Soviet Union ushered in a new international security environment that can no longer be explained by the dominant security paradigms utilised by most Western governments and analysts since World War II. Our understanding of security falling under the rubric of high politics, and focused on maintaining the territorial sovereignty of state actors has been questioned by several ongoing international dynamics. For example, inter-state conflicts have been replaced by rising occurrences of intra-state violence; the state as the central focus of international affairs has given way to a host of non-state actors; and, it has become increasingly evident that the greatest threat to security emanates from the rapidly evolving phenomena of terrorism and transnational organised crime (TOC). In actuality, national, regional and international experience with insecurity over the past decade has confirmed that terrorism and TOC deserve paramount attention precisely because they both span national boundaries, and thus are necessarily multi-dimensional and organised; and, because they directly threaten the stability of states by targeting economic, political and social systems.
Topic:: Security, Crime, Economics, and Terrorism
Political Geography:: Soviet Union

3173. Well-Rooted? Land Tenure and the Challenges of Globalization

Author:: Michelle Vosburgh
Publication Date:: 05-2002
Content Type:: Working Paper
Institution:: Institute on Globalization and the Human Condition, McMaster University
Abstract:: There is increasing pressure in the developing world to implement reforms that will facilitate more efficient land use and capital investment through the use of Western-style surveys, ownership and title registration. Proponents of traditional land systems have opposed these Western reforms by arguing for land's cultural and social importance. This article is a historical exploration of this issue within the context of contemporary globalization. The changing attitudes towards land tenure practices are traced through an examination of the published materials of the United Nations, its agencies and member nations. Historic and contemporary examples illustrate the difficulties of preserving traditional land systems in the face of economic and political integration.
Topic:: Agriculture, Economics, Globalization, and Political Economy

3174. Understanding Regional Economic Growth in India

Author:: Jeffrey D. Sachs, Nirupam Bajpai, and Ananthi Ramiah
Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: The John F. Kennedy School of Government at Harvard University
Abstract:: This paper aims to understand the growth experiences of fourteen major states of India in the period 1980 to 1998. We use two measures of convergence, s-convergence and ß-convergence to examine whether per capita income in the states have been converging or diverging. By both standards of convergence, India demonstrated overall divergence during the period 1980-98, as well as during both the pre-reform and post-reform sub-periods. Interestingly, the richer states experienced a degree of convergence during the post-reform period, while the poorer states did not. Divergence was most notable within the poorer group of states. As against the U.S. states, Japanese prefectures and the European regions, both India and China display no signs of conditional convergence much less unconditional convergence. We suggest four possible hypotheses: (1) the geographical differences are larger in India and China than in the United States, Europe, and Japan; (2) population movements in the United States, Europe, or Japan more readily arbitrage differences across regions; (3) policies of the national or regional governments prevented convergence, and (4) economic convergence is easier at higher levels of economic development than in China and India. A remarkable 82 percent of the cross-state variation in growth is explained by just the urbanization variable in India, and with no hint of any conditional convergence after controlling for the degree of urbanization. The regression estimate shows that a 10-percentage-point higher rate of urbanization is associated with 1.3 percentage points per year higher annual growth. We also offer some preliminary explanations for the unusual growth experiences of some states. We consider four such mysteries: (1) the mediocre growth of Kerala despite excellent social indicators; (2) the relatively fast growth of landlocked, and arid Rajasthan; (3) the improved growth performance of landlocked Madhya Pradesh; and (4) the poor growth performance of coastal Orissa.
Topic:: Development, Economics, and Regional Growth
Political Geography:: South Asia and India

3175. A Decade of Economic Reforms in India: The Unfinished Agenda

Author:: Nirupam Bajpai
Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: The John F. Kennedy School of Government at Harvard University
Abstract:: This paper aims to assess the economic reforms in India undertaken during the 1990s. India has gone through the first decade of her reform process. Hence, an assessment of what has been achieved so far and what remains on the reform agenda is in order. Reforms in the industrial, trade, and financial sectors, among others, have been wide and deep. As a consequence, they have contributed more meaningfully in attaining higher rates of growth. A decade of opening of the economy has produced new dynamism, most dramatically in the information technology sector, but in others as well. The new technologies (especially information technology and biotechnology) give new opportunities for economic and social development. It is necessary to move swiftly to complete many of the reforms, which are now underway. Examples of such continuing reforms are the reduction in protection levels, continuing reforms in banking sector, product de-reservation for the small-scale industry, decontrol of prices, such as petroleum, reform of the power sector and so on. Among other things, sustaining higher rates of economic growth would require a more vigorous pursuit of economic reforms at both the federal and state levels. Significant reduction of fiscal deficit is the first order of business. Unless substantial fiscal consolidation is achieved, in our view, continued fiscal deficits pose India's greatest risk to future destabilization. Other critical reforms include, labor laws, exit policy, privatization of state-owned enterprises, further opening-up of the economy to trade and foreign direct investment. In addition, there is a vast amount of economic reform that can be carried out to improve conditions in rural India, especially in the Gangetic valley. The reforms implemented so far have helped India attain 6 plus percent growth, however, should India be able to implement the remaining reforms and re-orient governmental spending away from inessential expenditures towards high priority areas of health and education and infrastructure development, then it is very likely to attain and sustain even higher rates of economic growth.
Topic:: Development, Economics, Science and Technology, Reform, and Economic Growth
Political Geography:: South Asia and India

3176. Targeted Programs in an Economic Crisis: Empirical Findings from Indonesia’s Experience

Author:: Lant Pritchett, Sudarno Sumarto, and Asep Suryahadia
Publication Date:: 09-2002
Content Type:: Working Paper
Institution:: The John F. Kennedy School of Government at Harvard University
Abstract:: In response to the economic, natural, and political crisis that enveloped Indonesia from August 1997 (beginning of depreciation) to May 1998 (resignation of Soeharto), the new government announced support for a set of “safety net” (JPS) programs in July 1998 budget. These included: (a) targeted sales of subsidized rice, (b) work creation programs, (c) scholarships to students and block grants to schools, (d) targeted health care subsidies, (e) community block grants. We used cross sectional and panel data to examine the targeting of these programs. First, "static participation incidence" (the relationship between program participation and household consumption expenditures) was substantially better than a uniform transfer, but substantially worse than perfect targeting --and remarkably similar for all of the JPS programs. Second, unlike standard static incidence measures, what we define as dynamic participation incidence — the relationship between changes in consumption expenditures and program participation — was very different between the JPS programs. The employment creation programs which relied on self-selection targeting was much more likely to reach those households with large shocks to their expenditures than programs based on administrative targeting such as subsidized rice sales, scholarships, and health subsidies. Third, larger coverage does not lead to either better or worse targeting: there is no general tendency across the programs for marginal incidence to be above, or below, average incidence. Fourth, the targeting design of many of the programs was not followed strictly in implementation in all of the programs. Community and individual characteristics that were de jure irrelevant played a role in targeting in practice. In the rice program, community influence led to the program going to many more than the eligible individuals. In other programs, individual characteristics appear to have influenced targeting.
Topic:: Economics, Financial Crisis, and Subsidies
Political Geography:: Indonesia and Southeast Asia

3177. Small Producer Deforestation in the Brazilian Amazon: Integrating Household Structure and Economic Circumstance in Behavioral Explanation

Author:: Marcellus Caldas, Robert Walker, and Stephen Perz
Publication Date:: 10-2002
Content Type:: Working Paper
Institution:: The John F. Kennedy School of Government at Harvard University
Abstract:: This study examines the impact household structure and economic circumstances on deforestation in the Brazilian Amazon. It presents the results of an analysis conducted at property level, using both survey data and information derived from remote sensing. Regression analyses and spatial autocorrelation tests are given, following a theoretical development integrating notions of the household economy with von Thünen. The results from the empirical model indicate that social and demographic characteristics of households, as well as institutional and market factors, affect land use decisions. Thus, aggregate studies and spatially explicit models that do not include household information may be subject to specification bias.
Topic:: Economics, Deforestation, Remote Sensing, and Behavioral Modeling
Political Geography:: Brazil, South America, and Amazon Basin

3178. Globalization and Catching-up in Emerging Market Economies

Author:: Grzegorz W. Kolodko
Publication Date:: 05-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: The study discusses conditions and prospects for fast and durable growth in emerging market economies. In the course of history less than 30 nations have become rich and still more than 80 per cent of the world population lives in the middle and low-income countries, some of them in extreme poverty. It is true not only for the majority of economies traditionally considered as 'developing countries', but also for the new, post-socialist emerging markets. Thus the questions arise: what is the influence of globalization process on economic growth and how real are the prospects for these emerging markets to catch up with more advanced countries? What factors may contribute to sustained and rapid growth over the long term? The paper examines strategies that can help taking the contemporary wave of globalization to the advantage of fast growth of less advanced countries and hence containing the existing development gaps.
Topic:: Economics, Emerging Markets, Globalization, and International Trade and Finance

3179. The Benefits and Costs of Group Affiliation: Evidence from East Asia

Author:: Stijn Claessens, Joseph P.H. Fan, and Larry H.P. Lang
Publication Date:: 05-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This paper investigates the benefits and associated agency costs of using internal capital markets through affiliating with groups using data of two thousand firms from nine East Asian economies between 1994-6. We find that mature and slow-growing firms with ownership structures more likely to create agency problems gain more from group affiliation, while young and high-growth firms more likely lose. Agency problems are important explanatory factors of firm value in economies outside Japan, but less so in Japan. Consistent with the literature, financially constrained firms benefit from group affiliation. Our results are robust to different time periods and estimation techniques.
Topic:: Economics and International Trade and Finance
Political Geography:: Israel and East Asia

3180. The Macroeconomic Repercussions of Agricultural Shocks and their Implications for Insurance

Author:: Paul Collier
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: The paper considers the macroeconomic impact of shocks to agricultural output and of negative and positive price shocks. It is shown that negative price shocks have particularly large externalities: it is estimated that the overall impact of these negative shocks on GDP may well be double their direct impact. In terms of policy, the presence of externalities justifies subsidising the provision of insurance. If insurance is not feasible, then foreign aid may be helpful. Turning to other systemic shocks, it is argued that the macroeconomic consequences of negative output shocks are far less important. Positive price shocks also have substantial macroeconomic externalities via their effect on asset demand. Appropriate central bank policy is crucial and requires a detailed understanding of asset demand changes in response to price shocks. Since this may well be unlikely, dollarization may be a better strategy.
Topic:: Economics, Government, and International Trade and Finance

3181. Financial Regulation and Supervision in Emerging Markets. The Experience of Latin America since the Tequila Crisis

Author:: Barbara Stallings and Rogerio Studart
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: The paper deals with changes in the regulation and supervision of the Latin American financial sector in the aftermath of the 'Tequila Crisis' of 1994–95. While it finds that both have improved, regulation and supervision cannot resolve all problems; good macroeconomic policy and performance are essential complements. This is especially true because of the procyclical nature of financial activity. The paper presents both regional data for Latin America, contrasting it with other emerging markets, and four country case studies (Argentina, Brazil, Chile, and Mexico). The latter show how individual country characteristics and experiences affect the operation of the financial systems. We close with some policy recommendations.
Topic:: Economics, Emerging Markets, and Government
Political Geography:: Brazil, Argentina, South America, Latin America, North America, Mexico, and Chile

3182. Debt Relief under the HIPC Initiative. Context and Outlook for Debt Sustainability and Resource Flows

Author:: Lisandro Abrego and Doris C. Ross
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This paper analyses debt relief efforts by creditors to alleviate the debt burden of low- income countries. The Heavily Indebted Poor Countries (HIPC) Initiative builds on traditional debt relief, and for the first time involves relief on multilateral debt. It seeks to reduce debt to sustainable levels and eliminate any debt overhang that might hinder growth and investment. It provides substantial debt relief to eligible countries by reducing their overall debt stocks by about one-half, or, together with traditional relief over time, by some 80 per cent. It lowers debt service payments of HIPCs substantially, provides room for increased social spending, and provides a solid basis for debt sustainability. The latter requires efforts by both debtors and creditors. To find poverty reduction efforts, HIPC relief is important, but much broader international support is needed as external transfers to HIPCs in the past far exceeded debt service paid. Experience has shown that external support can only be effective if it reinforces sound policies implemented by HIPCs themselves. Thus debt relief and ODA are most important not in isolation, but as help for self-help.
Topic:: Economics, International Organization, and International Trade and Finance

3183. Assessing the Impact of Fiscal Policy on Poverty

Author:: Andrew McKay
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: Fiscal policy measures are a key means by which governments can influence distribution and poverty, but in fact the relationships between fiscal policy and poverty are not well understood. The most commonly used technique for assessing the distributional impact, benefit incidence analysis, is straightforward, but applied by itself it suffers from a number of serious limitations. Assessment of the impact of fiscal policy needs to be developed in various directions, including allowing for behavioural responses and incorporating a broader range of information. In parallel with this careful attention needs to be paid to more effective monitoring of the poverty impsact of fiscal policy.
Topic:: Economics, Government, and International Trade and Finance

3184. International Bank Lending. Water Flowing Uphill?

Author:: John Hawkins
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: International bank lending is a major component of capital flows between advanced and emerging economies. However, in recent years these flows have been going the wrong way, like water flowing uphill. Even four years after the Asian crisis, there is a net flow of funds from emerging economies to banks in advanced economies. This paper looks at this phenomenon, starting by setting out the relevant data, and then looking at factors influencing these flows. These include both cyclical influences (both 'push' and 'pull') and structural changes within the banking industry. There is some evidence that international lenders are now discriminating more between the various emerging economies.
Topic:: Economics, Emerging Markets, and International Trade and Finance
Political Geography:: Asia

3185. Countercyclical Fiscal Policy. A Review of the Literature, Empirical Evidence and some Policy Proposals

Author:: Carlos Budnevich L.
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: For many emerging market economies, over reliance on monetary policy may bring worse macro results, when compared to a more balanced framework of countercyclical fiscal and monetary policy. The use of countercyclical fiscal policy requires as a precondition solvent and sustainable fiscal accounts and the re-engineering of fiscal institutions to increase the timeliness and flexibility of fiscal policy. A higher degree of tax or pension fund and/or unemployment insurance contribution flexibility may help in economies subject to significant external shocks. Automatic indexing rules to terms of trade or country risk spreads for pension contributions and interest payments on public debt may also contribute to the stabilization effort. If fiscal revenues are highly volatile, structural budget rules and commodity stabilization funds may provide the necessary framework to achieve saving (dissaving) during expansions (contractions).
Topic:: Economics, Government, and International Trade and Finance

3186. Aid, Public Sector Fiscal Behaviour and Developing Country Debt

Author:: Mark McGillivray and Simon Feeny
Publication Date:: 04-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This paper looks at public sector debt in developing countries, being concerned specifically with the relationship between aid inflows and the public sector borrowing requirement net of aid loans. After examining the public sector budget constraint and various conditions under which aid might lead to an increase in this borrowing, the paper surveys the empirical results of literature on aid and public sector fiscal behaviour. It finds that the results of a number of studies are consistent with aid leading to increases in this borrowing. Further investigation, in the form of econometric analysis of panel data, also points to this outcome. The paper then looks at a number of theoretical scenarios in which aid leads to increases in borrowing net of aid loans.
Topic:: Economics, Government, and International Trade and Finance

3187. Producing an Improved Geographic Profile of Poverty: Methodology and Evidence from Three Developing Countries

Author:: Chris Elbers, Peter Lanjouw, Johan Mistiaen, Gabriel Demombynes, Jenny Lanjouw, and Berk Özler
Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This paper implements a methodology for estimating poverty in Ecuador, Madagascar and South Africa, at levels of disaggregation that to date have not generally been available. The methodology is based on a statistical procedure to combine household survey data with population census data, imputing into the latter a measure of per capita consumption from the former. The countries are very unlike each other—with different geographies, stages of development, quality and types of data, and so on. Yet the paper demonstrates that in all three countries the poverty estimates produced from census data are both plausible (in that they match well stratum-level estimates calculated directly from the household surveys) and satisfactorily precise (at a level of disaggregation far below that allowed by household surveys).
Topic:: Development, Economics, Government, and International Trade and Finance
Political Geography:: South Africa

3188. One Third of the World's Growth and Inequality

Author:: Danny Quah
Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This paper studies growth and inequality in China and India—two economies that account for a third of the world's population. By modelling growth and inequality as components in a joint stochastic process, the paper calibrates the impact each has on different welfare indicators and on the personal income distribution across the joint population of the two countries. For personal income inequalities in a China-India universe, the forces assuming first-order importance are macroeconomic: Growing average incomes dominate all else. The relation between aggregate economic growth and within-country in- equality is insignificant for inequality dynamics.
Topic:: Development and Economics
Political Geography:: China, South Asia, India, and Asia

3189. (Re)Distribution of Personal Incomes, Education and Economic Performance Across Countries

Author:: Günther Rehme
Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: In many OECD countries income inequality has risen, but surprisingly redistribution as well. The theory attributes this partly to the redistributive effect of education spending. In the model income inequality and growth depend in an inverted U-shaped way on education. To maintain a given level of human capital it is shown that a less efficient schooling technology requires more resources, which lowers pre-tax and post-tax income inequality as well as growth. Using consistently defined income data from the Luxembourg Income Study suggests that there is a negative relationship between growth and income inequality in rich countries. It is argued that using some unadjusted inequality measures in growth regressions may yield estimates that are biased upwards. The evidence suggests that a rich country would raise growth with lower pre-tax and post-tax inequality if it spent more on education.
Topic:: Development, Economics, and Education

3190. Non-Financial Corporate Risk Management and Exchange Rate Volatility in Latin America

Author:: Graciela Moguillansky
Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This article studies the currency risk management of multinational companies with investments in Latin American countries. The analysis is centred on episodes of currency or financial shocks, searching into the behaviour of the financial management of a firm expecting a significant devaluation. This allowed us to explore the interaction and transmission mechanisms between the microeconomic behaviour and the macroeconomic impact on the foreign exchange market. The analysis was carried out interviewing financial managers of multinational companies from different sectors with headquarters in the United Kingdom and Spain, by reviewing literature on business and currency risk management, and by analysing some surveys on financial risk management in developed countries.
Topic:: Economics and International Trade and Finance
Political Geography:: United Kingdom, South America, Latin America, and Spain

3191. Does a Switch of Budget Regimes Constrain Managerial Discretion? Evidence for Italian Public Enterprises' Investment

Author:: Elisabetta Bertero and Laura Rondi
Publication Date:: 03-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This study examines the effect of the hardening of the budget constraint on the investment behaviour of Italian state owned enterprises (SOEs). It carries out a natural experiment that exploits the 1987 shift of budget regimes due to the pressure of European Union economic policies on the Italian government.Drawing from the theory of capital market imperfections, we apply the empirical framework for the analysis of investment-cash flow sensitivity to a panel of state-owned manufacturing firms during the period 1977-93. We parallel state firms to Anglo-Saxon public corporations which, under separation of ownership and control, are afflicted by agency problems, managerial discretion, misallocation of free cash-flow and overinvestment. We argue that, under a soft budget constraint, state firms' managerial discretion and, in particular, collusion between managers and vote-seeking politicians, lead to wasteful investment.
Topic:: Economics and International Trade and Finance
Political Geography:: Europe and Italy

3192. Why isn't there more Financial Intermediation in Developing Countries?

Author:: Jonathan Conning and Michael Kevane
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This paper proposes to organize thinking about the opportunities for improving and extending financial markets and safety nets for the poor, by focusing on factors that may explain why the linkage of local financial networks and safety nets with the larger economy often fails or is incomplete. Understanding the nature of these impediments is the first step in proposing policies to help promote more effective linkage and intermediation. We propose four explanations for the slowness of adoption of intermediation (high costs of delegated monitoring aggravated by limited intermediary capital; lock-in and crowding out effects from local insurance arrangements, social norms against cooperation with intermediaries; and political resistance to new institutions that shift the balance of power in local polities). Of course, financial repression and weak legal systems remains important as cause of lack of intermediation. We conclude with a review of public policy for more effective intermediation.
Topic:: Development, Economics, and Government

3193. Insolvency and Debt Recovery Procedures in Economic Development: An Overview of African Law

Author:: Clas Wihlborg
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: Insolvency and debt recovery procedures are as crucial to a well-performing financial sector as credit provision itself. They are even more important in Africa, where attempts are underway to create fully-fledged financial markets. For the financial system to be credible, creditors must be ensured that lenders will meet their obligations and that cases against them will be brought to closure. A good legal framework for insolvency also ensures distressed firms a form of orderly exit, thereby enabling their owners to start afresh. However, institutions of this nature take time to take effect, and need to be supported politically and by reforms in other sectors of the economy.
Topic:: Development, Economics, and Government
Political Geography:: Africa

3194. The Gradual Erosion of the Social Security Function of Customary Land Tenure Arrangements in Lineage-Based Societies

Author:: Jean-Philippe Platteau
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: Customary rules governing access to land and other natural resources in village societies have characteristics that allow them to fulfil social security functions and achieve equity objectives. This is true of both common-property resources and land parcels held under individualized tenure. However, when land pressure increases under the combined influences of population growth and market integration, a shift occurs from extensive to intensive resource use patterns. As a result, the efficiency costs of erstwhile equity-and insurance-oriented arrangements rise, thus forcing them to evolve significantly. In particular, land tenure arrangements undergo a major transformation towards more individualized forms with the consequence that property rights in land are increasingly defined without regard for equity and insurance concerns.
Topic:: Development, Economics, and Government

3195. The Growth Elasticity of Poverty

Author:: Rasmus Heltberg
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: How much does economic growth contribute to poverty reduction? I discuss analytical and empirical approaches to assess the growth elasticity of poverty, and emphasize that the relationship between growth and poverty change is non-constant. For a given poverty measure, it depends on initial inequality and on the location of the poverty line relative to mean income. In most cases, growth is more important for poverty reduction than changes in inequality, but this does not render inequality unimportant. Reduction in inequality may be triple effective: (1) it will reduce poverty for a given level of income, (2) it will accelerate the poverty reducing impact of economic growth, and (3) according to cross-country growth regressions, it may contribute to a larger rate of growth.
Topic:: Development, Economics, and International Trade and Finance

3196. Poverty Incidence and Sectoral Growth: Evidence from Southeast Asia

Author:: Peter G. Warr
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: In recent decades, absolute poverty incidence declined in most countries of Southeast Asia, even though in some of these countries inequality increased at the same time. This paper examines the relationship between these outcomes and the rate of economic growth in the agricultural, industrial and services sectors. It develops a time series of available data on the headcount measure of poverty incidence for Thailand, Indonesia, Malaysia and the Philippines over the period from the 1960s to 1999, in aggregate and in both rural and urban areas. It then uses this pooled data set to analyze the economic determinants of changes in poverty incidence.
Topic:: Development, Economics, and International Trade and Finance
Political Geography:: Indonesia, Malaysia, Philippines, Thailand, and Southeast Asia

3197. How Economic Growth Reduces Poverty: A General Equilibrium Analysis for Indonesia

Author:: Peter G. Warr and George Fane
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: Do changes in poverty and inequality depend directly on the rate of economic growth, or does the source of the growth also matter? This paper uses a computable general equilibrium model of the Indonesian economy to explore this question by simulating increases in GDP arising from (i) technical progress in each of seven broad sectors, and (ii) the accumulation of each of six types of physical and human capital. The more a given amount of growth raises the returns to the factors that are more important sources of income for the poor than for the non-poor, the more it reduces poverty and inequality. Different sources of growth affect poverty and inequality differently because they affect factor returns differently, and because the poor and the non-poor own factors in different proportions.
Topic:: Development, Economics, and International Trade and Finance
Political Geography:: Indonesia and Southeast Asia

3198. Hardening a Soft Budget Constraint Through 'Upward Devolution' to a Supranational Institution: The Case of Italian State-Owned Firms and the European Union

Author:: Elisabetta Bertero and Laura Rondi
Publication Date:: 01-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This paper contributes to the literature on the role of decentralization in hardening the budget constraint of public enterprises. Following Qian and Roland the study adopts a 'federalist' approach. However, it interprets federalism as the upward devolution of domestic economic policies to a supranational authority and examines its role in disciplining public enterprises operating in a soft budget regime. The methodology is a case study of the shift in budget regime in Italy in the late 1980s. The study shows that a determinant role in driving this shift was played by European economic policies. The discipline imposed by participation in the EMS, the Single Market Programme and, later, the requirements to enter the EMU pushed the Italian government toward a much tougher approach to its budget deficit.
Topic:: Economics, Government, and International Trade and Finance
Political Geography:: Europe

3199. Privatization in sub-Saharan Africa: On Factors Affecting Implementation

Author:: Steve Kayizzi-Mugerwa
Publication Date:: 01-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: Although privatization has been a key feature of economic policy in Africa since the early 1990s its sequencing and intensity have varied from country to country, with donor leverage being an important determinant of the pace of implementation. However, although many privatization schemes were undertaken in response to donor demands for reduced government participation in business, the process soon achieved its own dynamics. The positive view of privatization suggests that it went ahead, in spite of domestic opposition, because politicians and bureaucrats perceived real benefits to themselves and their supporters. They could influence the sales to their own benefit, while, on the other hand, a more focused public sector improved service delivery.
Topic:: Development, Economics, and Government
Political Geography:: Africa

3200. Understanding the Silicon Valley Phenomena

Author:: Masahiko Aoki and Hirokazu Takizawa
Publication Date:: 01-2002
Content Type:: Working Paper
Institution:: United Nations University
Abstract:: This paper analyzes the "Silicon Valley model" as a novel economic institution in the domain of technological product system innovation such as computers. We focus on the information structural relationship as well as governance relationships between venture capitalists and a cluster of entrepreneurial firms. The informational conditions under which the Silicon Valley model is efficient are identified, leading to understanding the significance of standardization of interfaces, modularization and information encapsulation. We then examine the governance/incentive aspect of the model by integrating the models by Aoki (2001) and Baldwin and Clark (2000) to give comparative statics results regarding the optimal number of entrepreneurial firms competing in the same component product. The analyses enable us to evaluate the applicability of the model beyond specific localities and industries.
Topic:: Economics and Industrial Policy
Political Geography:: United States

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COLUMBIA UNIVERSITY PRESS